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Real Estate: Effective Risk Management

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Effective risk management is one of the most crucial aspects in any area of work. When a business is able to identify risks before they occur, it becomes easier to control and monitor them to minimise negative impact on the business’ operation. When assessing risks involved in the property industry, it’s important to be particularly aware of the possibility of litigation and your Duty of Care obligations. This report will identify potential risks and explore the possible consequences to the agency and consumer. These risks will then be analysed for the likelihood and severity of the risk area, and evaluated for the overall level of risk and given the appropriate method of treatment(s).

Duty of care in an open house

When an agency representative opens a vendor’s house to the public, both the agency and vendor have a legal duty of care towards those who enter the property. Open houses can be chaotic; it would be impossible for an agent to control everything that goes on, especially when there is only one agent assigned. This poses a risk if anyone were to injure themselves whilst on the property. For e.g. a young boy trips down the stairs and knocks himself unconscious. He is rushed to hospital. This had happened because both the agent and parents were busy discussing details of the house, which left the young boy unsupervised. Although the agent conducted a risk assessment and identified all possible hazards the previous week, there was no way to have predicted or avoid this accident from happening.

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This example would be in breach of the duty of care of the vendor and sales agent, and exposes the agency to a possible law suit. The probability of this happening is unlikely, with a medium impact on the agency. Overall, I would classify this as medium risk priority. To control this risk, the best option would be to take out a public liability insurance. By doing so, it removes the risk from the agency and transfers the consequences to the insurance company. The public liability insurance covers costs associated with injury, death or property damage.

Another possible risk in an open home includes theft or breakage. Unfortunately, an open home is as if you are inviting random strangers to walk in from the street. There is a reasonable chance of items being stolen from an open home, although it would have a low impact on the agency. This would overall rank as a medium risk. Similar to the previous example, this risk can also be transferred to an insurance, however there are more ways to reduce the likelihood of theft than of a slip and fall accident: as an agent, you could warn clients of the dangers of open homes and prepare a fact sheet to inform them what can be done to mitigate risks. Sellers should be advised to remove or lock up any valuables for the duration of the open home and encouraged to opt for home and contents insurance. The agency should also ensure that there are enough agents on site during the open home to supervise those who attend.

Code of ethics violation

The violation of code of ethics is another risk associated with real estate. Under Property, Stock and Business Agents Act (2002), it is illegal to purposely withhold information/material facts that go to the heart of the home buyer’s decision, or may affect the home buyer’s decision. This forces agents to disclose facts about the history of the property, such as a murder, suicide, etc.

A case study in relation to this was the home of Sef Gonzales. Sef Gonzales was found guilty for the mass murder of his family in their North Ryde home. In 2014, LJ Hooker sold the house and chose not to disclose the tragedy to the new home owners. Upon finding out, they demanded a refund of their deposit as they no longer wanted the property. The case pushed for the new law through State Parliament. The consequences for non-compliance would be severe; agents found in breach of this law could be fined, suspension of license and/or may have legal action taken against them. If this were to receive public attention (e.g. published in the newspaper), it would also result in a loss of reputation for the agency.

However, it is entirely possible for an agent’s individual actions to unintentionally breach this law due to lack of knowledge about the property. Setting a compulsory agency policy and procedure throughout the workplace can help control and reduce the likeliness of this happening, such as the need to carry out extensive background research on a property using various sources. Another policy to implement could be agents to record information in a diary when meeting with the vendor, so as to protect the agency in an event of a lawsuit. Seller’s Discloser forms should be signed by all buyers, and as an agency you should strive to stay upfront with all clients and know your professional standards inside and out.

‘For Sale’ sign placed on council property

There are specific guidelines when it comes to where signage can be placed. The only place real estate signage is permissible without council permission is on the actual property for sale. Having undertrained staff could lead to an advertisement board being placed in an unsuitable location. This could range from telephone poles, footpaths, blocking traffic signs or sight distances, and results in a number of consequences. The sign would be impounded by the council, where the agency will be liable for any fines/Penalty Infringement Notice given along with it. The agency could also be at risk for a lawsuit if a member of the public were to trip over a sign placed on the footpath. The rate of occurrence would be unlikely, whereas the consequences and impact is high. This overall ranks as a medium risk with planning required. An agency could choose to control the risk by hiring trained agents with experience, and facilitating adequate training to those who don’t. Policies in procedures could be put into place for the office to follow when it comes to the danger of signage.

Losing data due to technology

Technology can be particular useful when it comes to entering large amounts of data. For e.g., property management software is used by an agency that lists owners and tenants, tracks rent received, record notes about the tenancy and generates monthly and end-of-year financial reports for property owners. If the back-up system is not run daily, the agency is at risk of losing data through a virus or technological mishap. The possibility of this risk happening is moderate, with a high severity impact as the agency could be looking at loss of reputation as well as financial loss due to not being able to efficiently run the business until the records are recovered. To treat this risk, control measures can be placed such as delegating the task of running the back-up system to a responsible team member or hiring IT to schedule the back-up to run automatically daily, after office hours. It would require continuous monitoring, with the aim of a successful back-up every day for 3 months.

Misleading and deceptive conduct claims

Another potential risk is misleading and deceptive conduct claims. For example, incorrectly advertising a property’s land size. This can happen when an agent relies on information that has been provided to them via third parties and online portals that has proven to be incorrect. Under the Australian Consumer Law (ACL), it is considered illegal conduct if real estate agents mislead buyers or sellers in the market. A claim can be put against an agent if they have passed on incorrect information about the land size, dimensions or any other kind of information about a property which may impact the sale, although they believed it to be true.

It is the responsibility of the agent to verify the accuracy of the information provided. They can do this by engaging with sub-contractors, in this case a surveyor to confirm details of the property. The repercussions of this is severe as it’s possible for loss of license and a lawsuit. Errors are easily made when an agent relies solely on third party information. Doing market research and asking for a second opinion confirms the accuracy of information and lowers the risk of accidentally misleading consumers. The vendor or their solicitor should verify the details of the property in writing prior to the marketing campaign. Under Property, Stock and Business Agents Act (2002), professional indemnity insurance is compulsory which provides protection for the agency against legal liability arising from the conduct and practice of the business and its employees.

The same can be said for agents giving advice in a field they are not an expert in. E.g. a sales agent giving an inaccurate appraisal to a vendor without any prior experience. In this case, an agent should seek advice or have an expert specialising in property valuation to have a look at the property. If the agent is found to be giving inaccurate advice, the agency will face legal action. This risk can be reduced by using disclaimers in paperwork which states the information is only an estimate, although disclaimers do not cover all liability. It should be printed on all documents such as brochures, flyers, sign boards or any online advertising of a property. As stated above, professional indemnity insurance also covers agencies against this type of risk.

Agency purchasing a rent roll

Agencies may choose to purchase rent rolls to grow their property management business, however purchasing a rent roll may come with a number of financial matters including repair and maintenance fees for one or more properties, claims from landlords arising from mismanagement by the current agent, failing to complete the required condition reports or pay other building expenses behalf of the landlords. The likelihood and magnitude of such claims would be assessed by the agent through an audit of the property files, and it would be up to them if they choose to take on the financial consequences of the risk.

Tenant is continuously late to pay rent

The agency has a duty of care to act in the best interests of its clients. When a tenant is continuously late to pay rent, this creates a risk for both the agency and consumer. The landlord may point fingers to the agency managing the property for finding them an inadequate tenant. Where the agency doesn’t take precautions in selecting a tenant, the landlord is at risk of financial loss. The chance of this occurring is unlikely, with the consequence having a high impact on the landlord. This poses as a medium risk where the situation needs to be monitored. Property managers should reduce the likeliness of picking a bad tenant by regulating their process of selection, where the tenant’s history, their nature of income (if they have a stable job), reliability and their references should all contribute majorly to the final decision.

Landlord is slow to carry out repairs

Landlords/agents must attend to repairs and maintenance when reported by a tenant. The consumer is put at risk by not doing so, and breaches of the Residential Tenancies Act (2010). For example, a tenant has complained about a swimming pool lock. The family has noted that their toddler has managed to open the gate several times so it is likely he will succeed in the future. The landlord has been made aware. This situation represents an extreme risk if the toddler was to fall into the pool. Immediate action is required, however, the landlord is unwilling to pay for a locksmith to fix the pool gate lock. Using this example, the tenant could choose to finance the risk by fixing the lock themselves and under the Residential Tenancies Act (2010), ask to be repaid. The tenant could also report the landlord to the Consumer, Trader and Tenancy Tribunal for serious breach of duties and obligations. The tenant would need to keep all copies of all correspondence since they might be needed in court. The agency may choose to cease management of the property because of the landlord’s ignorance, and decide they cannot afford the risk associated with this property.

Property is sold below market value

When a vendor comes into an agency, they are relying on the professionalism of the agents. Unfortunately, dishonesty or incompetent agents opens up a number of risks for the consumer. An example would be a listed property is sold cheaply to the agent, a family member or associate therefore the vendor does not achieve the full market value. This results in a loss for the vendor. Properties cannot be sold for a discounted value due to the relationship of the agency to the buyer and it is against the law for an agent to act on the seller and buyer’s behalf at the same time. It can be hard to tell when an agent is being dishonest, but there are precautionary steps a vendor can take to ensure they do not receive this level of service, such as an agent’s checklist.

This could include (but not limited to): proof of license, evidence of success in the area, a market value assessment that appears accurate based on the vendor’s research, a signed market value estimate or even a price guarantee, a marketing plan, a commitment to provide you with regular reports and updates etc. They should also have their solicitor to check over any paperwork. Lastly, the vendor should not feel rushed in making a decision of which real estate agent to assign their property to. It is heavily encouraged that they see at least 3 agents before making a final decision. If the vendor finds the agent to be unfair, dishonest or incompetent later down the track, they are able to lodge a complaint with NSW Fair Trading.

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